EU Economic Governance: Lunatix 2

updated for the bank holiday and rentree coincidence August 2011,

Lunatix Two: A European Stabilisation Bank & the Dysfunctional European Commission Economic Policy development process

EXECUTIVE SUMMARY

Getting the European response to this financial crisis right is the responsibility of the European Commission and arguably it is the failure of Europe to position itself in a credible manner to world capital markets which is the main cause of the latest stochastics in bond yields and the Euro. The root is internal politics in the European Commission & resultant weakness in policy development leading to a return to a Franco / German policy axis (which will never work) . The cause of this current crisis stage is that electorates and capital markets discovered 'after the fact' through a media drip feed that the European Commission had not completed enablement of the EFSF1 as promised by the President of the European Council. This is indeed a massive failure of Economic Governance2.

Operationally, the European Commission has unique "right of initiative"3 in the protocols of EU decision making so the question is do the experts (Commission Officials) developing Economic Strategy proposals have the experience and expertise to do that properly? The decision making architecture and policy development process in the European Commission is structurally dysfunctional! It is not possible to draw any conclusions about the efficacy or otherwise of Monetary Policy strategies in the provision of a backstop or de-risking European sovereign bond markets from the success or otherwise of the EFSF. There exists a void of definition as to exactly what the EFSF is and into that void has poured the paranoia of world bond markets but also the fears of the German voter in particular who imagines that Germany will forever have to pay for colleague Euro nations. That need not be the case & that false impression in the wider Euro citizenry is a consequence of a failure to grasp the challenge appropriately in the European Commission. The current EU institutional architecture, failed directorates general, politically compromised decision making at the apex but fundamentally in general a total lack of Monetary Economic expertise at Commission official level has created a dysfunctional broken process of Economic Governance and Policy development which is not only failing Europe but is failing the world too.

Once the EFSF had been established and the confused message of its role and function promulgated, de facto the EU had established the most important financial institution on the planet. But the Commission (& the EC Presidency) did not have the experience and expertise to 1) realise that and 2) know how to put it into practice. Europe needs to get this right, we need a robust locus of expert Monetary Economic policy development; we need a credible market facing entity in the European institutional apparatus with an order book sufficiently capitalised to demonstrate authority and credibility to market participants whether despised "speculators" or bona fide vanilla pension funds; the European Economic strategy implementation process cannot continue to compromise the Central Bank by placing all reliance for Crisis Management upon the guardian of the integrity of the currency. The Commission and the European Council missed a window to do the right thing last year, it cannot do the same again this semester.

ANOTHER YEAR ON, ANOTHER EU COMMISSION ECONOMIC POLICY ERROR

The Lunatix4 are scrambling around again. The Financial Times5 describes the headless chickens in the European Commission attempting to crank up the EFSF 'after the fact' of the President of the European Council promising that it was already 'turning over'. This situation is not funny; the EFSF has zero credibility even if it had been enabled with legitimate powers to exercise its duties. Herman Van Rompuy, President of the European Council, promised the EFSF would be operational at the end of July 2011; it was not. One simply cannot engage with Capital Markets using empty promises, that is one basic rule. Getting the European response to the Great Financial Crisis (#GFC) right is the responsibility of the European Commission and arguably it is the failure of "Europe" to position itself in a credible manner to world capital markets which is the main cause of this latest down leg for the Euro; much more significant and longer lasting than that ill-judged US 'downgrade'. Markets got over the downgrade in a shrug but it is Europe that continues to concern this summer. That concern is destroying the ability of European member state governments to fund themselves this summer. That is a crisis. It may also be a key trigger-factor to world recession.

In my 'on the morning' critique of the May 2010 EU summit conclusions which created the EFSF, I criticised the policy and strategy development process of the Commission experts as much as I critiqued the EFSF outcome. Here I look in more detail at what the issues are in the European Commission Economic Policy development process which constrain it from developing credible Monetary Economic policy strategy. I examine the politics of the EU decision making process through its apex in the European Council and particularly I focus on the immaturity of the functioning of the first permanent presidency of the European Council.

THE EUROPEAN ECONOMIC GOVERNANCE POLICY ARCHITECTURE

The economic policy mistakes of the European Commission in 'Crisis Response' mode during the GFC have continued for another year. It is clear that the Commission did not realise that the partial institutional response of the EFSF was a Monetary Policy strategy whether compromised or not. By doing anything the Commission became a (de facto) Monetary Economic policy actor at the point of EFSF setup whether it liked it or not. The half baked EFSF proposal however effectively passed the buck to the European Central Bank and its incompleteness entailed that the ECB breached the 'Separation Principle' and operated at the "Outer Limits"7 of its authority and capacity. The source of this current crisis episode in the European domain is in the constraints and compromises of the internal politics of the European Commission and the resultant lack of expertise of its officials and thus the inevitability of inadequate economic policy development thus failed economic governance in Europe. The European Commission has become a de-facto Monetary Economic institutional-actor on the global stage. That happened as soon as the EFSF was announced. But Commission and the European Council President attempted to play that role partially with an EFSF un-established 'de jure'. An enormous failure of Economic Governance.

Notionally, right now, the European Commission controls a European private company (the EFSF) which has in the last weeks become the single key (the last backstop) to defending European sovereign member states from bankruptcy. The EFSF is the sole institutional locus of consolidated European Economic crisis response and the EFSF is an operational mess. One can regard the EFSF as a wholly owned subsidiary of the European Commission with the EU Member States as shareholders. The EFSF is the sole locus of continuing Economic Crisis response by the EU and response specifically to the Sovereign debt crisis since the European Central Bank is now operating at the "outer limits" of its legitimacy and capacity to support European sovereign debt issuance. If the ECB continues to expedite capital market engagement by Europe on behalf of the European Commission then it compromises its ability to manage its own balance sheet to support the integrity of the Euro currency. That is what is known as the "Separation Principle". In policy terms, rule number two is you cannot conflate the function of a central bank and the expedition of monetary policy. The paradigm of institutional governance in this regard is the United Kingdom, where first Tony Blair and Gordon Brown returned central bank independence and following similar Economic Governance strategy, George Osborne created the also independent "Office of Budget Responsibility"8. Economic Governance rule number 3: Engagement with capital markets by sovereign authorities is about clear messages and adherence to rules at the basic level.

THE UNCLEAR EFSF AND CONSEQUENT POLITICAL CRISIS

Right now it is unclear what the balance sheet of the EFSF is and what it is constitutionally enabled to do. The President of the European Council, Herman Van Rompuy in his "Fire Brigade"9 speech at the EU emergency crisis summit of July 2011 promised the EFSF would be the solution to Europe's crisis but the Commission had enabled the EFSF to do nothing whilst the European Council decided the EFSF should be doing more than initially envisaged. Van Rompuy had made similar promises in May 2010 at that crisis summit. The President of the European Council now has a serious credibility problem. Electorates and Capital Markets discovered through a media drip feed that the Commission had not actually undertaken the enablement of the EFSF which Van Rompuy had promised. Lower media echelons then refracted the problem and inflated the uncertainty by sensationalising the complex issues. The consequence is political crisis in European member states (Germany, France, Holland, Italy in particular) and the Franco / German axis10 dispensing with the European Commission for a strategy development day. This is a political crisis now, which exacerbates the Economic crisis by a multi-factor coefficient.

The failure of the European Commission to first anticipate and second then recognise its own locus and role in the European Monetary economic system once the EFSF was proposed caused the massive uncertainty over EU monetary institutional strategy which triggered this latest EU nadir in the Bond Markets. In a way its so blooming obvious its embarrassing. It is this type of Commission screw-up which invites capital market participants to deploy derivative security positions which exacerbate risk premiums to the point of market failure. All that banning short selling does is to shut the proverbial stable door, the original error was in the Commission, all the market is doing is recognizing that. But that failure of self knowledge is a key facet of naivety; currently the European Commission is like an adolescent on a gap year Eurorail trip, manifestly it massively lacks experience and expertise. It has the authority but it cannot develop nor expedite credible policy. There is no fundamental economic governance in Europe.

BOND MARKET UNCERTAINTY

Such (ironically, clear) uncertainty has consequences; it causes confusion in Treasuries and electorates of European paymaster member states (Germany, France and the Netherlands) and this talk of fiscal unions and fiscal transfers north to south is causing deep concerns and deep divisions intra-Europe. In the US Capital Markets the concept applied to the EFSF vacuum is "Euro-bond" issuance (whatever that may mean). This 'loose talk' applied to an undefined entity which reflects markets and electorates trying to second guess what the Commission intended is noisey uncertainty. Such a scenario plays into the hands of capital market speculators and you cannot blame them. All that speculation is solely a result of lack of clarity from the European Commission over the EFSF which was inadequately specified in the first place and looks even more lame, limp-wristed, pathetic and ineffective today.

INSTITUTIONAL POLICY MISTAKE = SOVERIEGN DEBT MARKET FAILURE

Failures in Sovereign Debt markets as a consequence of the key player in those markets being uncertain, unidentifiable and mis-specified is not a fiscal problem, it's a monetary problem, it's a problem on the institutional side of monetary policy. The lack of identification if you like by world capital markets of the EFSF is what is creating sovereign bond market uncertainty. That is not a fiscal issue, it's a monetary issue. As soon as 'expectation-failure' is clear then the problem is one of Monetary Policy, the reaction function of engagement between central authorities and capital markets which is the point of creation of money. The first step to fixing that kind of problem is to authoritatively establish the EFSF with an order book which can engage with world capital markets (as I argued 15 months ago)2 but also with the basic infrastructure and sufficient capital to enable the EFSF to be credible to world capital markets. Like any SPV (or indeed any modern bank) the EFSF needs a balance sheet, over-capitalised to do the job it is envisaged to do. But the expectational point (with hindsight now but clear to some 15 months ago) is that once the EFSF was promulgated conceptually by the European Council President, at that point the European Commission had already established a Financial Institution. For internal political reasons (read on) it had been done inadequately, a catastrophic Monetary Policy error.

WHAT IS THE EU / COMMISSION DECISION MAKING APPARATUS?

Herman van Rompuy (HvR) is the President of the European Council11 (EC). The EC is the executive decision making body at the apex of the EU institutional decision making pyramid. The European Council (EC) comprises Heads of State and/or Government of EU member states plus one - the European Commission. Jose Manuel Barroso12 as President of the European Commission has a seat at the EC. HvR is the first permanent president of the European Council. Previously (before HvR) the President of the European Council was a Head of State or Government. The Presidency of the Council for many years rotated on a six monthly basis around the member states of the council. The EC presidency is thus another seat at that table (plus 2 if you like) but significantly the "cabinet" of the EC Presidency is drawn from European Commission and Council officials! And yet Merkel and Sarkozy are meeting together in private, excluding the Commission. Has the Commission failed on a catastrophic basis of historic proportions, is it not self evident if one peers through the dark glasses of Commission impenetrability?

The European Commission ("Cion" for short) is the "Guardian" of the European treaties (to use common current official-speak); Cion does not represent any single member state, it represents the greater good of Europe, as a whole, that's the way it was established. In practical terms, operationally, Cion has a unique "right of initiative"1 in the policy development process; that is in practical terms it is Cion via Barroso (or indeed the EC presidency [Van Rompuy] which is primarily (first mover, if you like) enabled to set the agenda for EC meetings. It is Cion which is positioned to make or table propositions to the Council of the member states, that is why Cion initially proposed the EFSF in May 2010. Cion obviously operates in close consultation with the Council Presidency and it is the Presidency which is then responsible for ensuring that final decisions of Council are expedited in the manner agreed by Council. In that regard the Presidency (HvR) is assuring that Cion (Barosso) does what the member states told it to do.

To an extent that 'first mover' "right of initiative" precludes the member states from interfering with the decision making process of the EU. That is the member states do not themselves initiate policy proposals as a protocol rule even if for example in Economic Policy development they have personnel with much greater expertise and experience than Commission officials. In essence the "right of initiative" protocol creates a process of "conjecture and refutation"13 in EU decision making at the Council level. The Commission proposes, the member states, assent, refute or amend and the Presidency documents and assures implementation.

The European Council is supported by protocol and specialist committees below it which work up propositions and ideas before presentation. Each and all the member states maintain expert personnel on those committees. The comitology process entails that member states of themselves do not generally propose or table ideas through the policy or strategy development process prior to the EC. This is why the experts in the Commission are crucial. For it is in their domain that strategy and policy is developed uniquely. The member states through the decision making protocol only refine and amend what the Commission initiates.

To make matters worse, the decision making architecture in Brussels which centres on the Council Presidency and the Commission has been "streamlined" or "optimised" in the Crisis response process such that some in-built checks and balances have been circumvented. There is an Economic Crisis "Special Unit"14 which cuts across all vertical divisions of responsibility in the Commission known as Directorates General. That "Special Unit" now reports directly and effectively jointly into Barroso and Van Rompuy ("Laurel and Hardy") and it is these experts in that Special Unit who are responsible for Economic Policy initiatives and essentially the mechanics of Economic Governance. It is that group of officials responsible for the half baked, incomprehensible ideas being tabled at Council in the Economic policy domain. Thus it is fundamental to ask the question do these experts (Commission Officials) actually have the experience and expertise to develop economic policy and monetary strategy proposals which they are doing right now? Palpably not! The succession of catastrophic errors over the last 20-odd months clearly demonstrates that.

THE SELECTION OF HVR AS FIRST EU COUNCIL PERMANENT PRESIDENT

The selection of HvR15 as the best person in Europe to be the first Permanent President of the European Council was a decision cooked up in the Council by the most powerful members (DE, FR, UK, IT, ES); "the Big Five". HvR was selected because in particular those five members of the council wanted the weakest possible personality to become that first president. At that point "the Big Five" did not want a permanent presidency stronger than any individual member of the Council and particularly not themselves. You could effectively add a sixth big member of the European Council which did not want a Council President more effective than itself - Cion, i.e. Barroso!

On the 'plus one' basis through the "right of initiative", Cion is one of the powerful seats at that table. If you add to that the fact that it is Barroso's personnel who support the President then the Commission has two seats at that table, effectively. HvR is Belgian, he was Prime Minister of Belgium (a rare beast in itself) for about 5 minutes and at selection time was completely unknown outside Belgium. It is important to remember that at the selection point (of HvR) someone from the Big5 was never going to be the 1st permanent president of the council and that president could not be Portuguese, so HvR was a compromise, the weakest personality the big 5 could think of and ostensibly no threat to Cion & Barroso. Maybe with hindsight now, Barroso regrets his selection. Maybe he didn't want the Permanent President quite as Slapstick as he has transpired to be!

COMPROMISED DYSFUNCTIONAL ECONOMIC GOVERNANCE IN EUROPE

The development then of the EFSF compromise proposal flowed from that selection (of HvR) dynamic because the weak presidency and self obsessed Cion were constrained in the brief that could be prepared in May 2010 since the experts were asked not to put forward any proposition which might upset any member of the big 5; directly contradicting the whole purpose of Cion which is to develop solutions to problems which benefit Europe as a whole. European economic governance was compromised at that point. Thus we got this half baked proposal, this lame duck EFSF. It is also important to add (and clearly evidenced in several recent contradictory statements16 by Laurel and Hardy) that HvR and Barroso do not have an optimal working relationship (not surprising really); this matters because HvR has to rely on Cion people (experts) but they effectively report to Barroso. This is obviously a decision making architecture and a policy development process which is structurally dysfunctional; politically so deeply compromised that long term planning cannot occur and strategic thinking is smothered at birth, everything is essentially compromised, subsumed to the objectives of the Commission which are self preservation and power accretion. In that structurally flawed nexus Cion compromised the first obligation of itself in not thinking through and proposing to Council a credible, authoritative and comprehensible EU response to the financial crisis. Economic Policy, particularly Monetary institutional policy has to be governed by Rational Expectations rules, Central Banks take that as read today; that means policy must be credible, authoritative and comprehensible; basic! Those Cion experts in the Special Unit failed in their duty or were slapped down in following that duty to do the right thing for Europe for (internal-commission) political reasons. Let us be clear that whatever the German government thinks or the French people are convinced of, the role of Cion is not to avoid upsetting Germany, it is to develop policy and strategy which benefits all European citizens, clearly these fudged compromised and badly implemented proposals are not fulfilling that objective, are they?

ISSUES OF CAPABILITY IN THE COMMISSION EXPERTS

So this dysfunctional Economic governance within the European Commission and compromised development of strategy and Economic policy is clearly the source of inadequate proposals such as the EFSF. The Commission as guardian of the EU is weak in all things - it develops lowest common denominator policy in the economic domain. But the next question does have to be, do the Commission experts actually have the expertise and experience to develop policies of Economic Governance? Should these experts be making policy proposals such as EFSF? Do they understand what they are actually doing? Do they have the expertise or experience to understand the implications of their proposals and to see how compromised their own decision making process is?

The EFSF is in effect a bank. An SPV17 of that scale, (in the real world) is managed by investment banking expertise; look at some of the deals being done by European banks today to offload particularly property assets (e.g. Paribas or Lloyds) into variations on the SPV theme. SPVs are deployed to create 'limited life' locii of contingent credit risk for the Bank sponsor of the SPV into which the assets are placed. The SPV itself is managed by Hedge Fund / Private Equity / Investment Banking experts and complex contractual arrangements are structured to enable that contingent credit risk; the banks do this for SPVs of around the 2 billion up to 10 billion (Euro) scale. The EFSF is possibly going to be an SPV of a trillion Euros in size and we understand now that the experts who proposed the structure really do not know how to enable it legally never mind how to instantiate it operationally.

What the Cion experts did not realise at the point of proposal and acceptance of the EFSF was that in effect (as I have argued elsewhere) from an internal perspective an SPV is a bank in microcosm18 (that's why so many high-risk SPVs brought down the banking system after August 2007). But more importantly now that EFSF is so pivotal to the economic survival of Europe and European sovereigns, from an external perspective, the EFSF is not only a bank in all but name, it is the single most important financial institution on the planet. If I was able to see that 15 months ago then the experts in Cion who established it and supported HvR's "wishy washy" naivety through 2010 and 2011 who did not clearly do not have the expertise or experience to be making proposals to establish such vehicles. They simply do not have the experience or expertise to be developing economic policy and strategy in times of normalcy let alone a crisis. That much is obvious.

THE POLITICAL IMPLICATION OF COMMISSION INADEQUACEY

I have argued that Merkel and Sarkozy did not want a strong Council Presidency voice at the top table and that is why they are bickering together in Paris. The first major crisis the EU has faced and the Commission role has been obviated; what does that tell us? Once the EFSF had been established and the confused message of its role and function promulgated, de facto Cion had established the most important financial institution on the planet. But Cion (& the EC Presidency) did not have the experience and expertise to 1) realise that and 2) know how to put it into practice. That confusion was not only detected by the capital markets it has been sensed particularly by German and Dutch voters. Just recently the Dutch PM got himself in a fundamental mess19 over how the EFSF operated. But the Merkel headache today is a function of that confused message; the confused message only being itself a function of the anarchy and confusion and lack of understanding in the commission team of experts.

Right now, Merkel has a political problem, the 5-Series driving CDU voter in Bavaria and the C-Class driver on the autobahn to Bonn has the impression that the only solution to the problems of increasing sovereign risk in other European countries is essentially fiscal transfers from Germany since the EFSF is inadequate, i.e. that German fiscal transfers will be required on an annual flow basis from Germany to other European sovereigns on an open-ended basis possibly forever. The EFSF SPV as a monetary vehicle is not working so the only alternative is constant fiscal transfers goes the logic, oversimplified I know. Is this analysis correct?

In my view it is not but the reason that it has 'taken hold' in the minds of the German voter is a direct consequence of the naïvety of Van Rompuy20. Fiscal and Monetary policy are not mutually exclusive and a crucial aspect of Monetary Policy is Institutional Configuration which given that such institutional establishment is in the power of governments, the institutional aspect of Monetary Policy may seem fiscal-like. The Cion experts simply do not understand this. In effect Cion has established a bank which they do not want to define as a bank (but it is still a bank). The EFSF is a key Financial Institution in the world monetary system. It is what it is. The only people who don't seem to know that are the people who established it. So the EFSF has all the responsibilities of a bank and none of the mechanisms, none of the power. Thus it is not possible to draw any conclusions about the efficacy or otherwise of Monetary Policy strategies in the provision of a backstop to European sovereign bond markets or de-risking such markets from the success or otherwise of EFSF.

THE SOLUTION TO A MONETARY CRISIS IS NOT FISCAL

Monetary and Fiscal policies are not mutually exclusive, they are not alternatives in the strict sense, they are like different barrels of the same gun. It is the consequences of fiscal strategies in causing state control of the economy to creep into the private sector space (known as "Crowding Out"21) which makes fiscal activity anathema today. The failure of the EFSF given the manner of its setup is not a sufficient condition for us to conclude that Monetary solutions to precipitous Sovereign Risk have all failed. The failure of the EFSF is a consequence solely of the internal politics of the European Commission which entailed that the EFSF was terminally dysfunctional ab initio.

That terminal dysfunctionality of the EFSF caused the worst kind of uncertainty - a void of definition as to exactly what the EFSF was established to do and into that void has poured the paranoia of world bond markets but also the fears of the German voter in particular. As soon as the EFSF was articulated it, the EFSF became a new European Monetary Institution. That should have been anticipated under Rational Expectations by Commission experts. But their focus was internal commission political constraints and they inadequately specified a monetary solution. That inadequate specification has enabled sensationalist media to construct black and white fear-mongering about fiscal-transfers and eurobonds, all of it nonsense simply as a result of the inadequacy of commission expertise and the exigencies of commission hierarchies and power-madness.

That fear is entirely a function of the Commission experts lack of grasp on Monetary Economics. The solution model, the blueprint for a properly constituted EU backstop financial institution can be abstracted from the best thinking in Monetary Economics since the 1980s; a European Stablization Bank22 operating to support European Capital Markets and particularly European sovereign bond issuance, massively capitalised, facilitating the Central Bank to do its job without breaching the Separation Principle and subsuming the Economic Policy development and Economic Governance functions of the European Commission. Creation of such an institution does not entail either Eurobond issuance (as currently understood) and would require a one-off capitalisation of a balance sheet and would not require on-going fiscal transfers from the German taxpayer. If you want to get it right Europe, this Stablization Bank is the correct answer! A monetary solution to a market expectational crisis.

GETTING EU MONETARY INSTITUTIONAL POLICY RIGHT

The EU is a political union of 27 countries. The Euro is a Monetary Union of 17 countries. The Euro is one of the two most important currencies in the world. But the Euro is a politically driven monetary union at the atomic centre of the EU. Thus the Euro requires Monetary Economic policy development at the core of the EU which is second to none in the world. This is regardless of whether the Euro is in crisis or not. The European Central Bank is responsible for the integrity of the Euro as a global currency, under the separation principle, though, the Central Bank is not and cannot be responsible for development of Economic Policy for the EU (and thus by extension the Euro). The Central Bank is not the locus of such policy development; it requires to be separated from that process so that it can focus upon the integrity of the currency given the Economic Policy and Institutional configuration developed at the political centre of the European Union. Sure, consult the Central Bank but have an Economic Policy development architecture at the centre of the EU. Currently this does not exist since the existant Economic Governance architecture developed in crisis response panic has quite clearly singularly failed to demonstrate it is up to the job.

The sovereign debt crisis in Europe is a monetary phenomenon, the banning of short selling in Europe demonstrates that regulators, central banks and the European Commission recognise that. The response then must be a properly thought through Monetary solution. Inadequate thinking in the European Commission in Brussels has led political leaders and ordinary voters to believe that all monetary solutions have failed. The real problem is that the EU at its centre in the Commission, in the experts so far engaged does not fully understand Monetary Economic policy nor Monetary institutions. Monetary Policy and Institutions to support the Euro are absent but the political will is there leaving Europe to return to a pre-Commission period where Merkel and Sarkozy have to agree policy on the hoof together without Commission presence. The EU needs a powerful Monetary Institution, properly capitalised which works in partnership with the Central Bank system through the ECB and provides not only backstop market participation in sovereign bond markets but also Monetary policy development for the EU. The current EU institutional architecture, some directorates general, politically compromised configuration at the top and lack of expertise in Commission officials has created a broken process which is not only failing Europe but is failing the world too.

CONCLUSION

The European Stabilisation Bank (ESB) concept is the grown up fully matured EFSF. The ESB would be another massively powerful European institution operating directly in world capital markets, fulfilling that function which as a result of the separation principle the Central Bank should not be fulfilling. It would also be a locus of 'politically un-compromised' Economic Governance and Economic Strategy development for Europe. It is what Europe needs now. It is indeed what Europe needed in May 2010; as I argued at the time, it is a no-brainer. Crucially also the ESB would be the locus of real expertise in economics, capable of promulgating clear messages on Monetary and Fiscal issues so that German and French citizens would not become terrified of fiscal chimeras.

FINALLY

Let me point out a concern of my own, it's a counter-factual, it cannot ever be validated. In my original critique of the May 2010 summit conclusion and Asymptotix subsequent development of the Stablization bank proposal I constructed a rough sketch "back of a fag packet" of the construction of the asset side of the ESB balance sheet. Gordon Brown recently argued23 that enabling the construction of such an entity with the IMF as a shareholder could facilitate the asset side of the balance sheet being partially made up of "Special Drawing Rights24" (super-money, if you like) at the IMF. Such "balance sheet width" added to the existant EIB and the EBRD which should in my view be consolidated into the ESB would create the scale of market participation required. If one integrates or capitalises the (revenue) budget of DG ECFIN and uses other such clever accounting techniques to gather together such balance sheet capital to create an entity with balance sheet scale sufficient to create 'shock and awe' in bond markets then one is going in the right direction.

half a trillion euros that otherwise would NOT have been necessary?

But! What is the cost of failing to do the right thing at the time required? Did the Commission miss a crucial market-expectational window in May 2010 when it could have created institutional 'shock and awe'? Is it the case that letting things drift for another 15 months simply because Commission experts did not understand monetary economics nor capital markets & internal commission power games were a greater priority than public service and thus being forced by markets to what should have been done in the first place is going to cost European tax payers an additional half a trillion euros that otherwise would NOT have been necessary? I believe this to be the case. And I think that curve rises every day! Do remember the bigger picture (particularly Herr German voter) under this proposition it's a one-off capitalisation, not an open-ended fiscal blank cheque. It's a Monetary Solution to a Capital Market problem but it takes some grasp of both of these complex domains to make a proposition like the ESB which actually might work. Is it the case that had an ESB been developed as a policy proposal at the moment those Lunatix went tripping on that grass in May 2010 with the EFSF. Would implementation of an ESB then (as advised here) have cost a half if not a quarter its INEVITABLY going to cost today or whenever "Europe" gets around to its inevitability and thus any further delay is simply going to entail that the costs of the inevitable and obvious solution simply rises inexorably? It's a dynamic world, there is little static about it, except the basic framework we require to understand its geography. Talking head pundits on news channels or in tabloids maybe annoying when they obviously don't get that but policy makers who don't understand what they are doing, must be replaced.

(it became known as "Rational Expectations"6 as a policy rule under Margaret Thatcher)

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